A recent report from the European Union's Innovation Hub for Internal Security pointed out that layer-2 solutions, ZK-proofs, privacy coins, and mixers could open a can of worms for law enforcement regulators.
Specifically, their report noted,
“Mixers and privacy coins have been complicating tracing for years, but Mimblewimble and zero-knowledge proofs are relatively new developments that can also obscure the visibility of cryptocurrency addresses, balances and transactions.”
The hub also added that solutions such as the lightning network could also be “abused” by criminals. According to them, they can use the layer-2 solution to make payments to each other without making the time and amount of these payments visible.
Likewise, even new wallet encryption schemes could complicate lawful access by law enforcement, the report added.
From the fundamental perspective, the of affairs has been refining. As chalked out in a recent article, the capacity of Bitcoin's lightning network has steadily been inclining. At the beginning of May, this metric was hovering around the 4755 BTC mark. However now, it stands at the door of 5000 BTC
Regulators around the world have raised eyebrows at the mere utterance of crypto mixers like Tornado Cash and other similar decentralized solutions that help users shield their identities. Elaborating on this, the hub’s report pointed,
“Mixer Tornado Cash has also been using zero-knowledge proofs to enable users to withdraw funds from the mixer without revealing what their original deposit was. This significantly complicates tracing the origins of (illicit) cryptocurrency for law enforcement.”
In fact, two Tornado Cash developers - Alexey Pertsev and Roman Storm - currently face money laundering charges.
In mid-May, Pertsev was given a 64-month sentence owing to the charges against him. A Dutch court convicted him of laundering $1.2 billion in crypto via the Tornado Cash mixer in the period between 2019 and 2022.
In fact, the judges were of the notion that the mixer was a tool “intended for criminals.” Right after, the developer appealed against the decision. Likewise, Storm is facing charges in the US. His trial is scheduled for September in New York.
